People who are well prepared and able to act quickly tend to do better in a buoyant M&A market and, with some sizeable recent transactions, continued interest from private equity, ongoing consolidation and some of the larger broking groups remaining interested at least in strategic plays, insurance broker M&A is likely to be just such a market in 2016. So how can you prepare?
Deal success depends on a range of factors - the strength and delivery of the business plan and financials, realising expected synergies and, in many cases, the smooth integration of the acquired business into the buyer's organisation being key. A well organised and timely FCA change of control application process is also important, but there are some other practical things that can be done, at the early stages of an M&A process, or even well before it starts, that can help shape a successful transaction. The points below are viewed mainly through the "sell-side" lens, but they are at the heart of any M&A deal. Giving them proper focus, albeit from different perspectives, can deliver benefits for all concerned - selling shareholders, trade buyers and private equity investors alike, not least in speed and efficiency of execution.
1. Check the house is in order
Investing time in getting organised, some months (or even years) before a planned sale, is time well spent. But even if time is short, thinking carefully about what goes in the data room, and anticipating the key things that buyers will want to focus on, will get the process off to a good start. As well as the usual content (e.g. financials, corporate documents, technology and employment contracts and property leases), the data room should include business specific information, such as recent correspondence with the FCA, summaries of PI and other insurance covers, key corporate policies (including those on conflicts of interest and anti-bribery and corruption), customer documentation and TOBAs, details of insurance schemes and arrangements with providers and headline details of any complaints. Clearly there is a judgement call to be made as to when sensitive commercial data, such as key client lists, goes across, but having the information readily available will be a big benefit when the time comes. For those on the buy side, it is all about planning ahead – which things do you want to see, what matters and how much, what can you learn from gaps in the data and what will make you walk away? Think about how you can make quick early assessments of what you see and then focus your detailed consideration on the things that really matter – especially if you are under time pressure.
2. Be on the front foot
As well as providing important content for any Information Memorandum describing the business, going through this internal review process early on may also flag up items that need to be dealt with, for example a lease that will fall for renewal right in the middle of negotiations. Also, being firmly on the front foot if any issues emerge is key – it's infinitely better to know about the critical IT contract that could be terminated on a change of control at the outset than to have the problem come up in the buyer's due diligence review. Buyers can, understandably, get nervous if significant issues emerge late in the day, so getting ahead of the game will help head off last minute problems.
3. Think about tax
As well as ensuring that the company's own tax affairs are in order, it is critical to think about the tax treatment of the selling shareholders. As long as the shares were originally issued for fair value and the right tax elections were made (if the shares are employment-related securities), capital gains tax will usually become payable on the sale of the shares in the company. Things should be relatively straight-forward if the sale price is paid in cash up front. But what if some of the sale price is deferred, or will only become payable under an earn-out? In that case, greater care needs to be taken to ensure that the price paid is properly subject to CGT and does not fall within the realm of income tax, unexpectedly attracting a higher rate of tax and national insurance contributions. This is an issue where the parties' views should be aligned as, although any income tax would be for the account of the seller, the company (as his or her employer) would be primarily liable to deduct the tax at source under PAYE and to pay employer NICs. Also, if entrepreneurs' relief is to be sought (taking the CGT down to 10%), checking at the outset that all of the qualifying conditions will be met may avoid difficult to solve issues emerging later in the process.
4. Pick the right sale process
In many cases, there will be an auction on the back of an Information Memorandum and potential buyers will be asked to submit initial expressions of interest, followed by a further round or rounds of bidding to select a preferred bidder for exclusive final negotiations. An auction process, and the competitive tension between rival bidders they create, can be advantageous for a seller, but it won't always be the right route. With multiple parties involved, the risk of a leak is greater, which can be destabilising, particularly for a business where the importance of people and relationships is key. A tighter negotiation with one potential buyer is potentially easier to keep under wraps and is sometimes the better route, particularly if there are some issues in the business that need to be resolved.
5. Review the shareholder base
If a broker is family owned, or owned by a significant number of individual shareholders, looking at the current shareholding structure to anticipate any challenges is also important; and, in any case, making sure that all of the key selling shareholders are on-side is vital. Sometimes shareholdings are widely spread, which can make getting everyone to sign up to a conventional sale agreement a challenge. In these cases, and sometimes when there are unwilling or untraceable shareholders, there are different ways to approach the sale – for example, a private company offer or, possibly, a Court sanctioned scheme of arrangement – but the implications of either route (not least to the timetable and cost) need to be factored into the thinking. Making sure that there is clarity on the impact of the deal on any share options will also be key and will avoid misunderstandings and delays further down the track.
These are just some of the practical considerations to take into account in the context of insurance broker M&A but, giving proper thought to these items can have a positive impact on the transaction for selling shareholders, potential buyers and private equity investors.